People pass a billboard placed by the police officers association in Stockton, where Chapter 9 bankruptcy was declared last year. NEW YORK TIMES FILE PHOTO

SACRAMENTO – Few nonlocal people typically pay much attention to the goings-on in Stockton, a hard-pressed Gold Rush-era industrial city of about 300,000 that sits in the agriculturally rich San Joaquin Valley, at the eastern edge of the California Delta. But bondholders, taxpayers and government officials throughout the country will be listening to U.S. Bankruptcy Judge Christopher Klein's ruling, expected Monday, as he decides whether the city may remain in bankruptcy and pursue a plan that stiffs the buyers and insurers of its bonds.

If Klein sides with the city, municipalities then will face a disturbingly low bar for pursuing bankruptcy. They will be emboldened to choose Stockton's course – i.e., using bankruptcy as a strategic policy tool to offload debts without having to confront the main reasons they went bankrupt in the first place, such as unaffordable pensions for their employees. Bankruptcy no longer will be an option of last resort. This should have an impact on bond markets.

If the city wins the case, contested this past week at the Sacramento federal courthouse, then the position of the public-sector unions and the California Public Employees Retirement System will prevail: No matter what problems befall a city, public services and taxpayers will suffer first while union members and public retirement systems are protected.

Granted, no one should feel too sorry for the lenders (and their insurers) who put money in Stockton's pension-obligation bonds. They knew the risks that come with lending money to a city – especially one controlled by its employee unions. But their argument is strongest: A city shouldn't use bankruptcy as a means to get rid of uncomfortable debts.

It should use this tool only when it has slashed its costs but still can't get out from under the debt load.

A Stockton management consultant called at the trial stated that the city would have a $100 million budget deficit in a decade if it does not receive Chapter 9 bankruptcy protection. He was supporting the notion that the city had no choice but to file bankruptcy. But how hard has the city tried to deal with its debts?

As the attorney for a bond insurer noted in his closing comments, the city intended, from the outset of this process, to shortchange the bondholders. It has refused to address its biggest debt – the payments that it owes CalPERS for its pension obligations. Stockton has only modestly pulled back employee compensation from rates far above the median for public-sector workers in California to somewhere near the average.

Essentially, the city plan has placed pension debt off the negotiating table, arguing that pension payments and benefits legally cannot be touched. A bankruptcy would be the forum to challenge that assumption, but Stockton officials have expressed no interest in doing so, figuring it's easier to stiff Wall Street than the unions. If Stockton gets its way, then cities can spend anything on pensions, and there would be no way to ever get out from under that obligation.

Some of the most-telling testimony came when bond insurer Assured Guaranty's attorney, Guy Neal, questioned Councilwoman Kathy Miller about a July 2012 video produced to explain the fiscal dilemma to Stockton residents. Here are some of her statements from the video:

"In the 1990s, Stockton granted its employees some of the most generous and unsustainable labor contracts in the state of California. ...

"Safety employees could now retire at the age of 50 .... . Many safety retirees today earn 90 percent to 100 percent of what they made when they were still on the job."

Such retirement payouts are common. But Miller noted that "Stockton went even further than most other cities and granted things like unlimited vacation and sick time that could be cashed out when an employee retired, and added pay categories for almost everything imaginable. ... Our public safety employees were costing us on average more than $150,000 a year each.

"That's three times more than most of us in Stockton make in a year."

On the video, Miller also described the "Lamborghini" health plan the city's employees received: "This was free medical care for a retiree and a dependent for the rest of their lives. No co-pays, no generic requirements, no HMOs, and no premiums. See any doctor, stay in any hospital, purchase any drug, and just send the bill to the city of Stockton."

Extravagant pay and benefits are common, and not just in Stockton. The San Francisco Chronicle revealed recently that Alameda County's top executive receives a $423,000 yearly pay package, and will for life. Total compensation for California firefighters is in the $175,000 range. Some Newport Beach lifeguards receive $200,000 pay packages.

As a friend of mine caustically observed, revolutions have been fought over lesser instances of public pilfering.

During its fiscal tribulation, Stockton pulled back on some abuses, but has left the main problem in place. Why is it OK that Stockton residents have to put up with closed parks, reduced policing and other cutbacks to protect these kinds of pensions, benefits and salaries?

Stockton leaders are floating a tax increase plan to fund police officers. But money is fungible so this should be viewed as a tax designed to pay for past boondoggles. Whatever the judge decides in Stockton's case, it's time for the public to stand up to these distorted priorities.

Steven Greenhut is vice president of journalism at the Franklin Center for Government and Public Integrity. Write to him at steven.greenhut@franklincenterhq.org.

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